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12 November, 2015

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Swachh Bharat Cess– Detailed Analysis and Open Issues

Swachh Bharat Cess– Details, Valuation, Abatement, Reverse Charge, Exemptions, Cenvat Credit and Open Matters (Applicable w.e.f 15th November, 2015)

CA Ankit Gulgulia (Jain)

The Central Government in what could be move which digs the pockets further imposed an additional swachh bharat cess (SBC) on taxable services vide Finance Act, 2015. Now the relevant chapter VI imposing such SBC has been decided to made operational w.e.f 15th November, 2015. Let’s discuss few key matters which require some understanding.

a) What is the Rate of SBC ?

Reply :- In accordance with Notification No. 22/2015-Service Tax dated 6th November, 2015, the rate of SBC shall be calculated at the rate of 0.5 percent of the value of taxable services. Hence the effective rate of service tax after SBC shall be 14% + 0.5% i.e. 14.5% of value of taxable services.

b) Whether Cenvat Credit of SBC Available?

Reply:- The SBC has been levied but no corresponding amendment in the provisions related to Cenvat Credit has been introduced. In such a case, the cenvat credit of SBC shall not be permissible. This requires immediate attention to be amended otherwise will hurt the trade.

c) What services would be liable for levy of SBC?

Reply:- Swachh Bharat Cess shall be leviable on all taxable services except on services which are exempt from service tax by a notification issued under sub-section (1) of section 93 of the Finance Act, 1994 or otherwise not leviable to service tax under section 66B of the Finance Act, 1994.

Hence services covered under Mega Exemption Notification, activities not leviable to service tax u/s 66B or services covered under Abatement notification No. 26/2012-ST (issued u/s 93 (1) – to the extent of specified exemption), other exemptions issued pursuant to 93(1) viz in case of SEZ etc shall not be subjected to the levy of SBC.

d) Whether services under Reverse Charge Mechanism would be covered under SBC?

Reply :- Yes it is applicable.

e) How to tax services currently listed under abatement notification?

Reply:- There might be conflicting views in light of loose drafting of notification on this aspect. In our view, where it is detailed that SBC shall not apply to the extent of exemption as notified u/s 93(1) pursuant to which Notification No. 26/2012-ST i.e. abatement notification have been notified, we are of the view that SBC shall be applicable at 0.5% on post abated Value on the proviso.

Say for Example in Residential Construction where that effective rate of valuation is 25% then tax payable shall be effectively 25% x 14% + 25% x 0.5% i.e. 3.625% only.

Though the government should amend the notification No. 26/2012-ST itself in clear manner to rest the doubts as the exemption notifications must be read in strict manner as held by judiciary in catena of judgements. Thereby till un amended atleast the 26/2012-ST cannot travel beyond the ambit of 66B !

Similarly, in case where the valuation itself is derived in prescribed manner that rate shall continue to be at 14.5% of prescribed value under Rule 2A, 2B or 2C of Service Tax (Determination of Value) Rules, 2006 as applicable to Works contract, restaurents etc.

f) What are the transitional provisions applicable?

Reply :- Resort to Section 67A and Rule 4 / 7 of POT, 2011. Where divergence of Section 67A vis-à-vis Rule 4 or 7 is observed, the provisions of section 67A shall prevail.

g) How to deposit SBC to government’s treasury?

Reply :- The accounting code are yet to be operationalised. It is expected to have a unique single code similar to what existed in Education or SHEC cess.

h) Whether SBC shall apply to Central Excise also?

Reply :- No, currently only on service tax.

i) Whether SBC shall apply to composition tax rates under Rule 6 of Service tax rules, 1994 like in case of air travel agent and others?

Reply:- The Issue requires clarification and suitable amendment to define the effective rates in such cases. On footing, SBC shall apply in such cases being in the ambit of levy of service tax.

j) Disclosures on Invoice?

Reply:- Due Disclosure of SBC u.s 119(2) of Finance Act, 2015 shall be made. Importantly the Credit Flow of SBC and Service tax are divergent. Further Accounting and record bifurcation shall be duly maintained.

Before Parting…

It is important that such notification of additional tax increases are issued after due diligence of all concerns. Leaving the Cenvat credit issues, abatement and composition scheme valuation SBC unclarified causes unneccesary confusion in trade which can be clearly avoided considering Central Government’s Pro –Trade Mindset !


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